Uk growth returns to pre recession levels

• Uk growth returns to pre recession levels
• BOE meeting will be closely watched
• US data is also improving

Sterling Dollar GBPUSD FX Technical Analysis

Sterling dollar has appreciated by almost 10% over the past year , moving higher just after Mark Carney began his stint as Governor of the Bank of England. Mr Carney announced at his first meeting that the bank would follow a policy of forward guidance which would allow markets to predict more accurately when there would be changes to policy. As the data has subsequently improved markets have been pricing in an early hike in interest rates. It now seems likely that the first rise will arrive within the next 6 months. Unemployment has fallen , the forward looking PMI's are all solidly in expansion territory and the housing market is rampant. Last month the Governor even stated that an interest rate hike may arrive earlier than the market had anticipated. This month inflation crept up to 1.9% and the preliminary estimate of growth in the second quarter was reported at 0.9% which means that output is now finally above the pre-recession peak. It would seem that a lot of the sterling supportive news is already in the price and we will need a fresh catalyst in order to make new highs. The International Monetary Fund highlighted this fact when they announced that in their opinion sterling was overvalued by 5-10% which is causing the economy to rely too heavily on consumer spending and imports. So much for the rebalancing that everyone was talking about.

Over in the United States the economic landscape also seems to be improving with GDP coming in at a 4% annualised pace in Q2. The Federal reserve has continued to taper their bond purchases and they are likely to cease adding stimulus by October. Market chatter is now around when the first increase in interest rates may occur. This allayed with the current geo-political worries in the Ukraine and the Middle East have helped to garner significant short term support for the dollar.

This week's Non-Farm payrolls will be very closely watched as usual and another solid reading above 200k will add to the feeling that the US economy is gaining momentum after the weather affected early part of 2014. I think that the Unemployment rate will is also important and if it edges below 6% this could have a bigger effect on the fortunes of the dollar.

Next week the focus will be back on the UK with the release of the monthly PMI's and a policy announcement from the Bank of England. This will be approached with more caution than usual as the inflation report from the BOE is also due in August and typically changes in interest rates are made in the same month. It is probably a little too early for a move from the current emergency levels but it cannot be ruled out entirely.

For USD Buyers

The exchange rate is still very close to the 6 year high so it would not be a terrible idea to reduce part of your exposure at current levels. The momentum indicators are a little oversold though so you may see a bit of a pullback before we continue lower. A break back above trend support which is now resistance would suggest that this recent correction was just that and the move higher has further to run. A break below the recent swing low 1.6698 would encourage many to think that we have already seen the highs in 2014.

For USD Sellers

Finally sellers have some relief! The trend line broke just above 1.7000 and that is now resistance. It is probably worth waiting to see if this correction turns into a reversal. Leave a stop loss above 1.7080 and hope for a break of 1.6698 which would open up much lower levels.